The Federal Reserve appears to have abandoned its discussion of yield-curve control, but bad monetary ideas have a way of returning. So it’s worth memorializing the failure of this experiment in Australia.

Yield-curve control is a policy by which the central bank sets an explicit interest-rate peg at one or more points along the yield curve. It’s supposed to lend more precision and credibility to policy since authorities can tell investors what rates “should” be, in contrast to tools with which central banks manipulate the...

A pedestrian passes the Reserve Bank of Australia (RBA) building in Sydney, Sept. 6.

Photo: David Gray/Bloomberg News

The Federal Reserve appears to have abandoned its discussion of yield-curve control, but bad monetary ideas have a way of returning. So it’s worth memorializing the failure of this experiment in Australia.

Yield-curve control is a policy by which the central bank sets an explicit interest-rate peg at one or more points along the yield curve. It’s supposed to lend more precision and credibility to policy since authorities can tell investors what rates “should” be, in contrast to tools with which central banks manipulate the quantity of money and then hope for the best on rates. With a rate target, the central bank doesn’t have to expand its balance sheet by buying assets unless markets decide to test the peg.

Australia tried it last year and the policy recently collapsed in embarrassing fashion. At the start of the pandemic in March 2020, the Reserve Bank of Australia eschewed the quantitative-easing asset purchases other central banks made. Instead, the RBA set a 0.25% target for the benchmark 3-year government bond, later reduced to 0.1%.

This worked for a while. In the weeks after the yield target was announced on March 20, the central bank bought bonds worth some 50 billion Australian dollars ($37 billion) to reinforce the credibility of the rate peg in investors’ eyes, and markets seemed to get the message. RBA officials such as Governor Philip Lowe touted their success setting the rate without expanding the RBA’s balance sheet to the levels in the U.S., United Kingdom or eurozone.

The Australians thought they had staved off demands for quantitative easing. In fact, their 3-year yield target was merely in the calm eye of a market storm.

After occasional episodes when the central bank had to buy bonds to shore up its rate target, disaster struck in October. Investors tested the peg again as inflation and confusing signals from officials raised questions about how long the RBA would continue targeting its 0.1% rate. The central bank was forced to buy 3-year bonds for the first time in eight months to defend the peg as the market pushed rates higher.

The RBA threw in the towel a week later. In the last week of October the central bank declined to intervene to support its rate target, and at its Nov. 2 policy meeting it abandoned yield-curve control. Mr. Lowe conceded that defending the peg might have required the central bank to buy the entire free float of the April 2024 bond it was targeting.

We warned about this risk amid the Fed’s discussion of yield-curve control last year. The policy works until it doesn’t, and as soon as it doesn’t the central bank is forced to defend its credibility by expanding its balance sheet at a time and to a level of markets’ choosing rather than policy makers’.

That’s a dangerous game. Investors pushed up the 3-year yield because they sensed inflation risks increasing, but then to enforce its rate target the RBA would have had to buy large quantities of government bonds. As Stephen Kirchner

of the University of Sydney notes, that would have increased the money supply and stoked inflation when markets were warning the RBA to scale back its stimulus. The RBA’s only escape was to abandon the target it had set with such gusto.

Yield-curve control is still running in Japan, where the central bank has avoided an Australia-style fiasco since the policy was introduced in 2016—but perhaps only because investors have never worried about inflation spiking there. Australia is a warning that this policy tool sets the stage for a standoff between markets and the central bank that the central bank can’t afford. This is one idea the Fed should stick in a dark corner of the cellar, never to see the light of day again.

The current spike in inflation is no accident. It's the result of reckless policies that squeeze the supply of goods and services—notably energy. Images: Reuters/AFP/Getty Images Composite: Mark Kelly The Wall Street Journal Interactive Edition